A rare interview with next generation Financial Thought Leader Ben Inker, co-head of GMO’s asset allocation team. Inker explains why he is increasing GMO’s cash levels and treading very carefully in both the stock and bond markets.

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Guest Info

Ben Inker

Newsletter

It has been a tragic week for Americans. Our hearts go out to the victims of the Boston Marathon bombings and their families. I grew up in Boston and know the beautiful Copley Square area, the excitement of Patriots Day, a uniquely Massachusetts holiday, and the pride citizens have in the marathon which attracts runners from around the world. There is a complete disconnect between that event and the deliberate act of terrorism which disrupted it. They do not belong together.

It is also hard to grasp the devastating explosion at the fertilizer plant in Texas, which has taken a terrible toll on the small town of West Texas. Our thoughts and prayers are with them as well.

This has been an extremely unsettling period for investors. They have gone from growing optimism about the economy and the outlook for their portfolios to alarm, disappointment, and fear about a global economic slowdown and earnings weakness. So called risky assets which have performed so well in the last six months are retreating. The recently record setting S&P 500 is now at a six week low, off 3.3% from its April 11th high. The Wall Street Journal reports that “first quarter earnings growth for 82 of the S&P 500’s companies had declined 0.4% through Thursday morning”. This week’s WEALTHTRACK guest doesn’t expect that trend to change. Market volatility, as measured by the Chicago Board Options Exchange Volatility Index, or VIX is increasing. According to Bloomberg, it is up 55% since reaching a six-year low in March. U.S Leading Economic Indicators, the LEI, a widely followed gauge of future economic growth, fell for the first time in seven months in its latest report. And there has been a massive sell off in commodities- spectacularly in gold, which is well into a bear market. Gold is 28% off its September 2011 record of $1,923.70 an ounce; 17% of that decline has happened this year.

We live in unusual times. Central banks around the world, led by the Federal Reserve, have taken unprecedented actions to stimulate economic growth, prop up indebted governments, and bail out troubled banks. And because it is an experiment, no one quite knows how it is all going to turn out.

One thing we do know for sure is the series of ground breaking actions by the Federal Reserve- keeping short term interest rates near zero for years and more recently buying $85 billion worth of treasury bonds and mortgage-backed securities every month- have kept interest rates artificially low. The Fed’s policies are being called “financial repression” by some on Wall Street.

What we don’t know is how it’s all going to turn out. What happens when the Fed and other central banks decide being this involved in financing governments, banks, and credit markets is either no longer necessary or is counterproductive? That is a question many of our WEALTHTRACK guests are extremely concerned about. Several recently called the bond market downright dangerous. But most investors seem far less concerned. According to TrimTabs Investment Research, bond funds are booming. They had sizable inflows in the first three months of the year, for the 17th quarter in a row- $72.3 billion worth. And unlike stocks, investors still favor actively managed funds by a huge margin. Over the last 12 months, bond mutual funds have seen inflows of nearly $280 billion versus $44 billion into fixed income ETFs. As TrimTabs points out, so much for the “great rotation out of bonds and into stocks. No such rotation has materialized.”

This week’s guest is strongly in the “bonds are dangerous” camp. He is Ben Inker, co-head of Asset Allocation at GMO, which stands for Grantham, Mayo, Van Otterloo, the last names of the three investment professionals who founded the global investment management firm in 1977. By far the most famous is Jeremy Grantham, its Chief Investment Strategist. GMO and Grantham are known for bold market calls and spotting market bubbles: Japan in the mid-eighties; the tech bubble in the nineties- several years early which hurt their business; the housing bubble in the 2000’s; the market low in March of 2009, exactly the month it happened! In recent years, including now, they have been warning of perils in the bond market.

Ben Inker has worked at GMO his entire career since graduating with a BA in Economics from Yale in 1992. He is also a member of the firm’s board of directors, portfolio manager of several of GMO’s asset allocation portfolios for institutional and high net worth individuals and of their mutual fund equivalents for the rest of us under the Wells Fargo name. Inker co- manages Wells Fargo Advantage Asset Allocation fund and Wells Fargo Advantage Absolute Return fund.

I’ll begin the interview by asking Inker to give us the world as GMO sees it.

As always, if you can’t join us at the appointed hour on your local public television station, you can watch the show on our website as a podcast or streaming video. You can also find the One Investment picks of our guests and my Action Points there.

For our premium subscribers this week, we have a list of the top rated S&P 100 companies, the place Ben Inker says we should be looking for the best and least risky values in the U.S. stock market. Plus we have an additional interview with him about how he got to GMO right out of Yale. It wasn’t the traditional path.

Have a great weekend. Keep your loved ones close. And make the week ahead a profitable and a productive one!

Best regards,

Consuelo

Action Point

RECOGNIZE THE VALUE OF CASH IN YOUR PORTFOLIO

Cash:

Protects portfolios from losses

Provides buying power when assets get cheap again

One Investment

High quality U.S. stocks

“Well, we do like the high-quality stocks in the U.S. It’s one group that you can buy and not have to worry too much about what happens to the global economy. I think the expected return through European value stocks are better, or emerging market stocks are better, but there are scenarios where those turn ugly. And the nice thing about the high-quality stocks is that they’re priced to do okay, and they should do okay even if we go down one or the other of the difficult paths.”

– Ben Inker

Transcript

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